Housing and Wealth

I am not an economist so this is more of a question than a statement. At least part of the credit crunch has been caused by the huge increase in house prices in recent years. In fact property prices before the crash reached levels that were way out of line with the historic ratio of income to property prices. Fine Gael and other parties in the Irish election all proposed measures to "help the recovery" of the property market. This mirrors steps over the past couple of years by several governments in the US and Europe to "help" or "fix"the housing market by taking measures that will cause house prices to stop falling.

I just don't see how this can work. House prices are not falling solely because their true value is being disguised by our economic difficulties. The difficulty in getting credit might prevent some from buying, but a lot of the problem is due to the fact that houses were NEVER worth the mad prices people paid for them in recent years. 


The solution to the collapse of the price of tulips following the tulip craze of the 17th century was not to use state funds to artificially inflate the price of tulips to the crazy heights of the peak of the boom. Similarly, spending public money to prop up house prices merely puts off the evil day when the market will reflect the true value of the property people bought.

We have to adjust to the reality that people paid more for houses than they are worth. People who did so will lose money and the economy may suffer. I am all for the state using money to ensure that credit worthy businesses can access the credit facilities they need to operate but pumping money into the housing market, as was done in the US, seems to be a waste of money.

Looking back I wonder if the real lesson is that the idea that we could get rich with our feet up by buying assets that would inevitably increase in value, is wrong. Sadly, those who bought into the idea that prosperity was simply a matter of getting on the "property ladder" whether we put off the evil day by throwing good public money after bad or not, are like to find out eventually, that the property market is as much of a snake as a ladder and that in general, real wealth comes, quite slowly through the application of effort and skill.